George Osborne today unveiled the first fully Conservative budget in eighteen years, claiming this was the budget for working people. Many of the key policies that will affect our clients have already been unveiled or leaked, but there were a few “rabbits in the hat”. We summarise the main changes below with our comments in each area;

Personal taxation and pay

  • Introduction of a new national living wage for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020
  • Inheritance tax threshold will include £175,000 of “primary residential property” nil-rate band, in addition to the existing £325,000 nil-rate band, meaning that a couple with a property valued at over £350,000 will have an effective nil-rate band of £1M
  • Personal tax allowance to rise to £11,000 in April 2016
  • The point at which people start paying higher rate tax to rise from £42,385 to £43,000 in April 2016
  • Permanent non-domicile status to be abolished – from April 2017, anyone who has lived in the UK for 15 of the past 20 years will pay same level of tax as other UK citizens
  • Mortgage interest relief for buy-to-let homebuyers to be restricted to basic rate of income tax
  • Rent-a-room relief scheme to rise to £7,500 in April 2016
  • Dividend taxes to be simplified, with the non-reclaimable tax credit to be abolished and replaced with a £5,000 personal dividend allowance, and tax rates of 7.5%, 32.5% and 38.1% accordingly. We await more detail on the specifics of this change.

Commentary: The rabbit-in-the-hat was the new “national living wage”, a welcome increase to tax for the low-paid which is intended to offset the tax-credit cuts. Our clients will be pleased to see the personal tax allowance increasing, as well as (finally) the higher rate allowance increase. The limiting of tax relief on mortgage interest will make Buy-to-Let less attractive for high earners and may therefore decrease competition for first-time-buyers. Whilst in our opinion overly complex, the new IHT nil-rate band for property will no doubt ease the concerns of some clients.

Welfare changes

  • Working-age benefits to be frozen for four years – including tax credits and local housing allowance
  • Rents in social housing sector will be reduced by 1% a year for the next four years
  • Higher-income households in social housing will be required to pay rents at the market rate
  • Tax credits and Universal Credit to be restricted to two children, affecting those born after April 2017
  • Reduce earnings level for tax credits withdrawal from £6,420 to 3,850
  • Disability benefits will not be taxed or means-tested
  • 18-21-year-olds will not be entitled to claim housing benefit automatically, with a new “earn to learn” obligation
  • Employment and Support Allowance payments for claimants deemed able to work to be “aligned” with Jobseeker’s Allowance for new claimants
  • The annual household benefit cap will be reduced to £23,000 in London and £20,000 the rest of Britain.

Commentary: A raft of welfare changes aimed at balancing the books. Alongside the new national living wage and reductions in corporation taxes these should help shift the subsidy of low pay from the taxpayer to employers.

Pension Changes

  • State pension triple lock to be continued
  • Green Paper published on proposals for “a radical change” to pension saving system, including the possibility of no tax relief on contributions but with a tax-free income
  • Annual pension contribution allowance reducing to £10,000 a year for the highest earners, which will taper from the £40,000 annual allowance when earnings exceed £150,000

Commentary: Nothing much new here, though we will keep a close eye on the consultations relating to pensions tax relief. The use of the annual allowance to reduce pension tax relief for the highest earners seems far more sensible than the earlier proposals of capping the allowance at 20%.

Business & taxation

  • £7.2bn forecast to be raised from clampdown on tax avoidance and tax evasion with HMRC budget increased by £750m
  • Bank levy rate to be gradually reduced over the next six years replaced by a new 8% surcharge on bank profits will be introduced from January 2016
  • Cap on charges imposed by claims management companies and an increase in insurance premium tax to 9.5% from November
  • New apprenticeship levy for large employers, to encourage investment in apprenticeships
  • Corporation tax to be cut to 19% in 2017 and 18% in 2020
  • Climate Change Levy exemption for renewable electricity to be removed
  • National Insurance employment allowance for small firms to be increased by 50% to £3,000 from 2016

Commentary: Overall good news for businesses large and small. Perhaps an obvious bribe to the large banks who have recently threatened to move their operations overseas. Lower corporation taxes and NI reductions should help to ease the pain of an increased wage bill for smaller companies.

Health, education & the public sector

  • NHS will receive a further £8bn by 2020 (in addition to the £2bn already announced)
  • Student maintenance grants to be replaced with loans from 2016-17 with an increase in the amount allowed to £8,200, to be paid back once people earn more than £21,000

Commentary: Cash commitments to the NHS can be misleading due to the effects of inflation, but this sounds like funding that the NHS desperately needs, and any increase will be welcomed.

Miscellaneous Announcements

  • No rise in fuel duty with rates continuing to be frozen
  • Major reform to vehicle excise duties to pay for a new road-building and maintenance fund in England
  • New VED bands for new cars to be introduced from 2017, linked to emissions – 95% of car owners will pay £140 a year
  • The cost of funding free TV licences for the over-75s will be transferred from the government to the BBC between 2018 and 2021
  • More regional devolution, with control over fire services, planning and children’s services to be handed to Greater Manchester
  • Discussions on devolution of services to Sheffield, Liverpool and West Yorkshire
  • £30m for new body to promote integrated transport – including use of Oyster cards – in the north of England
  • Government to spend 2% of GDP on defence every year, meeting NATO target, with
  • Spending on defence to rise in real terms every year during the Parliament
  • New £1.5bn Joint Security Fund to be created
  • New university professorships to be created to mark the Queen’s 90th birthday

Commentary: We are sure that it comes as no surprise that fuel duty rates have been frozen again! New VED rates will increase the costs of new car purchases but an update to the bands was long overdue. Interesting to note that there was no mention of tax on alcohol (which the chancellor has used for strategic cheers in previous budgets).